9 Reasons You Might Not Get a Mortgage

Applying for a home mortgage can be a time-consuming, costly, and frustrating process. When the housing crisis hit in 2008, banks and other mortgage lenders dramatically tightened the requirements on potential borrowers, leading to the denial of many mortgage applications. Indeed, according to industry estimates, as many as one-quarter to one-third of new mortgage applications are denied every year. Still, homeownership remains an essential part of the American dream, with some $2 trillion of new first lien mortgages approved in 2016. Since forewarned is forearmed, as the saying goes, here are some of the top reasons why mortgages are denied—and pain points you should address before you apply for yours if you want to avoid any nasty surprises.

Bad Credit

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Bad Credit Mortgage

So you know your credit score—that's great. But do you know how it affects your chances of being approved for a home mortgage? Banks and other lenders use the credit score to evaluate the likelihood that a borrower will be able to repay a debt. The common score used in the United States is the FICO score, ranging from 300 to 850, with a higher number indicating greater creditworthiness. Typically, lenders look for a credit score in excess of 620 when approving a borrower for a home mortgage.

Related: Where to Get the Most Bang for Your Real Estate Buck

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Bad Payment History

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Bad Payment History

Another significant factor that mortgage lenders look at when considering a borrower's application is payment history. Any past bankruptcies, foreclosures, repossessions, liens, court-ordered judgments, or late payments can cause a mortgage application to be denied.

Related: The Worst Money Mistakes Homeowners Ever Make

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No Job or Poor Employment History

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Employment History Mortgage

If you don’t have a job, or if your employment history has large, unexplained gaps, lenders may be reluctant to approve a mortgage. Similarly, people who are new to the workforce or self-employed individuals may have a harder time getting a mortgage approved.

Related: 9 Towns That'll Pay You to Move There

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Too Much Debt

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Debt Ratio For Mortgage

Your debt-to-income ratio compares your total monthly recurring debt to your gross monthly income. Most lenders require a debt-to-income ratio of 45 percent or less.

Related: 8 Things New Homeowners Waste Money On

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No Credit History

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No Credit History Mortgage

The length of your credit history—also known as “time in file”—can have an impact on mortgage decisions. Factors that come into play include the average age of any credit accounts and the age of your oldest credit account. People with an older credit history may have an easier time getting a loan than those with brand-new credit.

Related: 12 Surprising Truths About Millennial Homebuyers

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No or Too Low Down Payment

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Low Mortgage Down Payment

Most lenders require a down payment of anywhere from 5 to 25 percent of a home’s value before approving a mortgage application. Lenders also look at your ability to pay closing costs, points, mortgage insurance, and taxes.

Related: 10 Signs You're Paying Too Much for Your Mortgage

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Not Enough Collateral

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Collateral Value

Your prospective home may not be worth what you think it is. Just because you are willing to offer a certain amount for a home doesn’t mean the bank will actually give you a mortgage for that amount. The collateral value of a home, which is what the mortgage is based upon, is determined by an independent appraisal and comparable sales in the area.

Related: 12 Reasons Your Home Isn't Worth as Much as You Think

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Problems with the Property

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Property Issues Mortgage

You may have an excellent credit score, history, and income but still be denied a mortgage through no fault of your own. Problems with the home or property—prior liens, location in a flood zone, conservation easements, local zoning issues, lack of a clear title, court judgments, and other issues—could cause a lender to deny your application.

Related: 9 Ways to Get the Best Price on Your Dream Home

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Mistakes on the Application

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Mortgage Mistakes

It goes without saying that lying and fraud are big no-nos on mortgage applications. But you should also be very careful to dot every “i” and cross every “t” on your application, and make sure that you can verify the information that you provide. Keep complete and accurate records of all your income, assets, and debts.

Related: 11 Lies You Can't Tell When Selling Your Home

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Be Prepared

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Be Prepared

Be forewarned and forearmed as you head into the mortgage process.

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